The market has no alibi, it's ugly

Commentary: Forget rallies, search for quality

KelleyWright

LA JOLLA, Calif. (IQT) -- It's three weeks until Christmas and both the Santa Claus Rally and January Effect are already underway.

And why not? GDP has been revised up, there's a bigger crude supply than previously thought, the last jobs number was on steroids and the next one is supposed to be -- oh wait, this just in, 112,000?

Hey, there was supposed to be at least 200,000. The folks in charge of the exit polls must be doing employment numbers now.

As I was saying, the dollar is going down the toilet but hey, it made the evening news so that should mean a reversal is imminent. Wow, crude dropped to $42? Oh, it's back up to $43? No worries! It's the next leg up dude! Wahoo! Party on!

A little thing called 'employment gap'

Look, I appreciate a large portion of the Street and its ancillary industries are retail sales operations and aren't in the advice business. That's cool because this is America and we're all about free enterprise and caveat emptor. But eggnog and season's greetings aside, has anybody looked at the deceleration in profits lately?

You know, there is this teeny tiny little connection between earnings, profits and GDP. I know a bunch of folks are calling for the S&P to turn in double digit returns but I think this is a case of sugar plum fairies and visions, or however it goes.

Macro econ gives me a headache but there's this thing called the employment gap. This is the difference between what employment should be at this stage of a recovery based on a formula used since World War II, vs. what's actually taking place.

It would take three years of 200,000 jobs a month to get us to that level. For an economy that depends on consumer spending (you know, those folks with no savings and debt up the wazoo) and with rising energy costs, it just isn't looking good for disposable income -- just ask Wal-Mart
WMT, +1.90%

As for oil, pu-leeze.

The genie is out of the bottle with China and India, not to mention the insatiable demand from the U.S.

The nationalized oil companies that provide 60 percent of the world's oil production and hold 87 percent of proven reserves are in countries that don't want foreign investment in their oil.

My futures guru tells me we're going to $62 per barrel at minimum. Considering we've had four oil shocks the last twenty years and a recession after each, where do you think this debacle will lead us?

So forget the coming tech boom; we still haven't worked off the excess from the bubble. For those who think that basic materials will move higher forever, you had better look at the size of those moves and where their yields are relative to their historical profile (Caterpillar
CAT, +1.22%
U.S. Steel
X, +3.98%
United Technologies
UTX, -0.71%
).

Tried and true

We are looking for stability from high-quality companies that have stable dividends and a history of growing the same. Bristol-Myers Squibb
BMY, +0.53%
is in an industry that has been rocked for all the wrong reasons and the company itself answered for some sins its own making. The bad news is over however and the yield is around 4.7 percent.

We like Atmos
ATO, +1.71%
and Pinnacle West
PNW, +1.19%
in the utility sector because these stocks actually have an upside in addition to their dividends.

In closing, nothing says the Holidays like a good tobacco stock. Altria Group
MO, -0.97%
and UST
UST, +0.04%
are two of our favorites.

So put that in your Holiday pipe and smoke it.

Kelley Wright is the managing editor of Investment Quality Trends newsletter. He's been managing money for 20 years for high-net-worth individuals and institutions and is CEO of IQ Trends, a registered investment advisor. Wright has no personal positions in any of the stocks mentioned in this report but some securities may be held in client accounts. (iqtrends.com)

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